New Corp.’s (NASDAQ:NWS) intense focus throughout the hacking scandal is on salvaging the Murdoch empire, the family succession plan, advertising relationships and a second pass at acquiring the 61% of BSkyB it doesn’t own when things cool down. The tattered Fifth Estate is being treated like mere collateral damage.
There are business reasons -- much less ethical reasons -- why that is a strategic mistake. That’s not just for News Corp.’s asset stable, but all players in the unwieldy digital news and information space.
The rapidly unraveling scandal, coupled with troublesome trends and uncertain economics, will shape digital newsgathering and filtering standards, business expectations and media profits far into the future.
News Corp. has lost more than $6 billion in market value and its stock has fallen 13% since the hacking scandal broke earlier this month, according to an excellent overview in The Economist.
Analysts say the $41 billion global media player is worth about 50% more without Chairman and CEO Rupert Murdoch at the operational helm because he may make decisions that are not in the best interest of shareholders. A discount for the aging Murdoch, 80, baked into most estimates (well below rivals such as Walt Disney Co. (NYSE:DIS) and Time Warner (NYSE:TWX), would be removed if News Corp. Chief Operating Officer Chase Carey moved into the CEO role. The conglomerate would be worth closer to $80 billion if its businesses were valued separately, according to analysts at Barclays and Gabelli & Co.
James Murdoch, the youngest of two sons anointed as successor, is increasingly being discounted as CEO since he publicly conceded knowing about the scandal which has been unraveling for several years. Murdoch Sr. is scrambling to keep intact the family leadership even as the Murdoch control 38% of Class B voting shares in the public company, a majority of whose media assets are anchored in news and information gathering and dissemination.
That last part is lost on everyone swept into the fast-moving, intriguing controversy. Perhaps the most significant issue raised by the News Corp. scandal is whether news gathering and reporting, and overall information dissemination, by this conglomerate and every media company will be held to a higher standard -- which could go a long way to protecting its overall credibility and value.
Separating the sensational rapid-fire developments from the substance while convoluted events are sorted out can provide perspective on the long-range impact. Here are a few such reflections:
*The abrupt resignation of News International chief executive Rebekah Brooks two days before her arrest in London and the abrupt closing of News of the World a week earlier do not change the infraction equation. It only fuels the rage over who knew what when and how information was gathered. Ultimately, both moves primarily serve to protect the interest of News Corp. and the Murdochs.
Closing the century-old tabloid may protect News Corp. from having to retain and produce incriminating documents related to criminal claims the paper illegally hacked into private phone voicemail and email of rich, famous and private citizens. Chances are NoW will struggle for years with criminal and civil legal action against it, which will cost News Corp. money and credibility.
Chances are the scheduled testimony Rupert and James Murdoch, and Brooks, before UK lawmakers Tuesday, about News Corp. employees paying police confidential information used in stories, will do little to take the edge off the controversy. The questions are far-reaching and serious.
*Recovering the support of advertisers and other constituents will be painful, but the rift will be temporary -- as it almost always is in media controversies. News Corp. continues its international efforts to recoup the trust of readers and advertisers with full-page, apologetic newspaper ads, personal letters to key clients, and other communications about actions being taken to address the wrongdoing.
The gestures are geared to stem defections of advertisers and consumers from other News Corp. media properties—from US-based newspapers such as The New York Post ad Wall Street Journal to cable’s Fox News Channel, to the Fox broadcast network and its owned and affiliated TV stations. They collectively comprise the lion’s share of News Corp. revenues and earnings. The black cloud hanging over the US media properties is likely to swell from the Congressional and FBI investigations into whether News Corp. hacked into the voice mail or email of 9/11 victims and their families.
That is the kind of controversy that repels advertisers and marketers, already squeamish about spending in a listless economy. The timing couldn’t be worse.
Advertising, which comprises 44% of New Corp.’s overall revenues, generally is facing a new crisis of confidence and broad spending reductions especially in print, according to sources such as the IPA/BDO Bellwether survey and revised ZenithOptimedia growth forecast.
*The once revered all-business WSJ, now more prone to general interest news, is the crown jewel in Murdoch’s diminished newspaper fiefdom -- and suffering the pains of being the newly adopted sibling of at least one News Corp. publication that allegedly pays police for private information, provides large payoffs to silence phone-hacking victims and other questionable practices.
Its July 15 interview with Rupert could have been authored by News Corp.’s public relations department; sure evidence “the WSJ has been Fox-ified,” declared Joe Nocera in the rival New York Times.
The late Friday resignation of WSJ publisher Les Hinton, who dismissed any concerns of wrong doing, while chairman of New International’s UK publishing unit when the hacking scandal occurred and was investigated internally, will not insulate the U.S. paper from the unwieldy scandal. Protecting the WSJ’s business brand is critical and, perhaps, impossible as the intensely competitive digital news and information vortex increasingly makes little differentiation between legitimate and unsubstantiated sources.
WSJ’s annual $458 million from circulation and nearly $1 billion from advertising in 2010, according to Credit Suisse, may be the best it gets. Worse, is the threat to the value of the cable network, broadcast television and satellite operations that would comprise a streamlined News Corp., which Nomura Securities analyst Michael Nathanson estimates could grow earnings at a healthy annual 20% on average seven percent revenue growth through 2013.
*While Murdoch is being advised to cut and run from his beloved publishing business to control the contagion, the group only represents about one-quarter of News Corp.’s overall revenues and much less in earnings. The scandal’s threat to the licenses of its Fox TV stations and cable networks would be a more serious mater.
Still, CitiGroup analyst Jason Bazinet says he sees few scenarios that would result in permanent damage to News Corp.’s existing assets. The company’s newspapers in the U.S., UK and Australia generated about $6 billion in revenues in fiscal 2010. Overall, the publishing group that also includes HaperCollins and newspaper inserts, generated just over $1 billion in earnings on $8.5 billion in revenues.
A bigger financial issue is the $5 billion share repurchase just announced to appease disgruntled shareholders, which will leave News Corp. with about $2 billion in debt at the end of 2013 despite its $12 billion in cash it now has on its balance sheet.
*Despite political uproar on both sides of the pond, enough of the general public appears to reluctantly accept some degree of sordid tactics as fair game in an era of streaming high stakes news and information—from The NewYork Times and the New York Post to The Daily Beast and Huffington Post. Getting caught is the price paid for differentiation. Legendary journalist Carl Bernstein this week lamented that varying degrees of ethical breeches that have become the hallmark of News Corp. newspapers have sadly become expected behavior for the desperate and damned in news.
Ultimately, the question is how will these practices—scrutinized or not in the News Corp. scandal--redefine the public and private values of traditional and new digital media companies hinged on news and information?
Pew’s annual State of the Media report frames it this way:
That data may be the most important commodity of all. In a media world where consumers decide what news they want to get and how they want to get it, the future will belong to those who understand the public’s changing behavior and can target content and advertising to snugly fit the interests of each user. That knowledge -- and the expertise in gathering it -- increasingly resides with technology companies outside journalism.
With the News Corp. scandal dominating Twitter feeds, blogs and mainstream press, according to Pew’s weekly News Coverage Index, the issue of how far news organizations go to compete and profit clearly attracts audiences and sells.
The dilemma and drama surrounding the News Corp. scandal begs the question: if found guilty of criminal charges, will this permanently diminish the brand integrity and profits of other News Corp. properties such as the WSJ and The Sunday Times of London, and what deep-reaching ramifications will that have for the entire news business?
Note: This column has been significantly expanded and updated since first appearing in Mediapost.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.